Canadian Capital Magazine
By Mark Groulx – AIM Group Canada Ltd.
For many people, planning what you will do after you sell your business can be harder than it sounds. Many successful entrepreneurs are so completely involved with their business they have few interests outside of business. This will make the transition to retirement difficult.
Additionally, if the business revolves around a domineering owner with a centralized management style this can detract from the attractiveness of the business to potential buyers. A company’s value in the marketplace increases when it is less dependent on any one person to run it. Therefore, developing a complete management team is essential for the success of any company that wants to provide an efficient and more valuable sale process.
With this overriding consideration of building a management team to increase the value of your business in mind, following are some macro issues to consider before you sell your business:
Are qualified family members interested in acquiring control?
I once asked an entrepreneur if any of his children were interested in buying him out. He said, quite tongue in cheek, that they were a bunch of spoiled, rich kids who weren’t prepared to work hard enough to run the business. He was trying to be funny but was quite serious at the same time. Not surprisingly, the company was sold to a third party.
In many cases the children are the obvious heirs to the business. But in many cases, they are either not interested or not qualified to take over the business. Therefore, the decision to sell or pass it to the next generation needs to be discussed years in advance of a sale.
Are all shareholders ready to sell?
In companies with multiple shareholders, some shareholders may be looking for an exit while others are not. Such a situation can become confrontational. Often times it’s the non-active shareholders who receive substantial dividends and bonuses but are not involved in the day-to-day operations of the business that will hold up the sale. They don’t want to say goodbye to the golden goose, despite the fact that they will be receiving a large cheque if they do sell.
What are the industry dynamics?
Each industry has certain “dynamics” which need to be analyzed on a case by case basis. For example, if the company is in a capital-intensive industry, you need to determine whether it can generate enough cash to finance the cost of future growth. One client had to decide whether to upgrade all the equipment in their food processing business to remain efficient or accept significantly less money for it if they sold immediately. They decided to make the capital investment, which pushed their exit plan back by four years. That was the amount of time it took to show the increased earnings resulting from the upgrades. These “dynamics” for each industry can best be analyzed by independent M&A advisors.
What is the time frame for succession?
Many entrepreneurs don’t separate the business they run from their personal lives and don’t understand that the business should be there to both create long term wealth (equity) as well as to provide enough funds to support an attractive lifestyle.
We have often seen companies where owners are running substantial personal expenses through the company to fund their lifestyle. This is both dubious from a tax perspective and also something prospective buyers do not want to see, therefore making it more difficult to sell the business. Cleaning up the income statement should be done well in advance of a sale, anywhere from one to three years.
What are the owners’ personal financial goals?
An owner once told me he thought his company was worth $20 million. When asked why, he said that was how much he needed to retire. I broke the news to him that he couldn’t sell it for more than $8 million. As a result, he needed to keep the business, take a hard look at his lifestyle and re-evaluate his goals.
Many owners have not thought through their goals in life which is essential before an entrepreneur makes the decision to sell. We once helped a client sell a company he had inherited at a relatively young age as his father had passed away prematurely. While it wasn’t his passion, he ran it for 20 years and turned it into an efficient and profitable enterprise. He decided to sell it when he was 50. When I asked why he was selling, he said that he wanted to use the money to do something he was passionate about while he still could. He and his wife now own a winery and a big yacht on the East Coast. In this case, his personal goals and his financial realities became aligned.
At ground zero? Start here:
- What is your business worth? An M&A advisor can give you an estimate.
- How much income do you need to support your lifestyle in retirement?
- Who are the stakeholders in your business?
- Whom will a sale affect?
- Whose approval do you need?
- Is someone interested and capable of running the business in your absence?
- Are there personal expenses that should not be expensed in the business?
- Do you have a management team that can run the business?
This is a short list but all items to consider before a sale.